Is there still a case for active management?
Our Active/Passive Barometer reveals the winners in fund performance.
In a landscape dominated by passive strategies, the debate on the going relevance of active management is very much alive. Our latest Australian Active/Passive Barometer by senior analyst Zunjar Sanzgir, reveals some of the areas where active management continues to hold its ground and where it falls short.
The study looked at more than 800 open-ended funds across nine major categories, comparing active performance against passive counterparts over three, five and ten year periods ending June 30, 2025.
Below is an outline of some key definitions:
- Excess return: the difference between the average return of an active fund and the average return of a passive fund.
- Survivorship: the percentage of funds that were active at the start of a given period and still existed at the end.
- Success rate: The proportion (by count) of active funds outperforming the passive, provided the active fund has survived through the period. It illustrates the likelihood of a randomly selected active fund outperforming the comparable passive composite. This metric should be viewed in conjunction with the survivorship rate of the active funds within the category.
Overall findings
Unsurprisingly, the report points to passive outperformance in most categories in the past year. This has contributed to the decline of long-term success rates for active funds.
But as seen in the chart below, top-quartile managers in eight of nine categories delivered positive excess returns over the decade, highlighting the importance of manager selection in determining investor outcomes. Although, this process of deduction is easier said than done.
Passive strategies also continued todemonstratehigher survivorship rates. Even in categories where active managers had stronger success rates, lower survivorship may diminish the likelihood of investors realising prospective return advantages over the longer term.
Where active funds excelled
Mid/Small
Active managers maintain clear dominance in the Australian mid/small blend category. Notably, the longer the given period, the more pronounced the outperformance, both in terms of the magnitude of excess returns and success rates.
An important difference to point out here is how the benchmarks are built. Passive funds tend to follow indexes with stricter rules about what gets included. In contrast, active managers typically operate within a broader opportunity, giving them a better shot of outperforming.
Global bonds
Given interest rate swings have had a big impact on global bond markets in recent years, we see that active managers have certainly been using this to their advantage.Active funds also had the highest success rates (100%) of all categories observed, although with relatively low survivorship rates.
Active global bond funds have more flexibility to adjust duration and credit opportunities thus have consistently outperformed over every period. On the other hand, passive index-tracking funds are at a disadvantage here, due to often being locked into longer-duration exposures and therefore struggled to keep up in the dynamic rate environment.
Where passive still dominates
World large blend
Among all the categories, world large blend continues to make the strongest case for passive funds. Broad indices are highly efficient, proving a tough hurdle to beat and generate sustained alpha. Much of the outperformance came down to the continued strength of the US market. Even though the year experienced notable volatility, active managers were unable to effectively exploit this.
A surprising development
Emerging markets
Conventional wisdom stipulates that active funds should have higher success rates in less efficient corners of the market. But does this thesis hold when we look at emerging markets?
The figure below indicates active funds have a low success rate (48%) and failed to generate positive excess return across any of the given periods.
It is important to note that returns dispersion among active managers is most significant in this category. For example, over the trailing five-year period, the top-performing active strategy delivered almost 16% annualised returns versus the bottom performer at 2.9%. Consequently, manager selection has heightened importance here.
Whilst seemingly surprising, the results can largely be explained by a passive outlier – the multifactor ETF (which I’ve previously explored). This strategy overlays a rules-based selection process to an index, to determine which companies best reflect relevant factors. This approach heavily outperformed all other passive peers and skewed results.
Although the multifactor strategy somewhat distorts the excess return in favour of passive, it does not significantly affect active fund success rate.
